Asbury Automotive: Attractive With Ongoing Service Strength

Asbury Automotive Group (ABG) reported a strong Q2, surpassing EPS expectations with $7.43, driven by 6% revenue growth and robust luxury sales. The company's resilient business model, heavily reliant on less cyclical parts and service revenue (up 4% and contributing nearly half of profits), positions it favorably against potential auto tariffs and sales slowdowns, despite normalizing new car margins. ABG recently closed the $1.45 billion Herb Chambers acquisition, significantly expanding its dealership count, which will temporarily elevate leverage and shift the near-term focus to debt reduction over share buybacks. The analyst reiterates a "Strong Buy," citing the diversified brand portfolio, strong service segment, and an attractive ~10.5x earnings valuation, with raised FY25 EPS targets.

Analysis

Asbury Automotive Group (ABG) demonstrated significant operational resilience in its second-quarter results, beating earnings estimates by $0.57 with a reported EPS of $7.43. The company's business model proves less cyclical than the broader auto industry, as nearly 80% of its gross profit is derived from the more stable parts and service and finance and insurance segments. The core parts and service division posted a 4% revenue increase to $602 million (6% on a same-store basis), with strong growth in both high-margin warranty work (+16%) and customer pay (+7%), indicating no current slowdown in discretionary service spending. While new vehicle revenue grew 6% to $2.3 billion, margins are beginning to normalize, with gross profit per new vehicle down 1% to $3,600, trending towards the company's long-term guidance of $2,500-$3,000. Strategically, ABG is prioritizing growth through scale, evidenced by its recent $1.45 billion acquisition of Herb Chambers, which nearly doubles its dealership count since 2020. This acquisition will temporarily elevate leverage above the company's 3x target, shifting the near-term capital allocation focus from share buybacks to debt reduction, which is expected to normalize by late 2026. Despite near-term implementation costs for a new technology platform, SG&A as a percentage of gross profit improved by 100 basis points, signaling underlying efficiency gains.

Key Decisions for Investors

• Investors should recognize that ABG's valuation at ~10.5x earnings is supported by a resilient business model where profitability is primarily driven by its less cyclical and high-margin parts and service division, not volatile new car sales.
• Monitor the company's deleveraging progress following the Herb Chambers acquisition, as the pace of debt reduction towards its 2.5x-3x target will dictate the timing for the resumption of share buybacks, a key potential catalyst for the stock.
• Consider the company's ability to maintain strong performance in its parts and service segment, particularly same-store sales growth, as a primary indicator of the thesis's durability against potential macroeconomic downturns or tariff-induced pressures on new vehicle sales.
• Factor in the temporary pause on share buybacks and the normalization of new vehicle margins as near-term headwinds, but weigh them against the long-term benefits of increased scale and operational efficiencies from recent acquisitions and technology upgrades.